Meet Vix - she's frightening!

Volatility is the name of the game this week, as anyone who has logged in to an investment account will know. My brain is so fried, I had to jump into the sea this morning to cool down! We have seen key swings in emerging markets, India, and Japan. Of course, oil is the primary driver of these movements, and many Asian markets have a very heavy reliance on Middle East oil.

This week, the oil price has jumped around between $88 and $101. Japan’s Nikkei has fallen (Honda stalled, down 5.6% today) and the iShares MSCI EM ETF (in normal speak, that is just a big collection of about 1,300 shares in emerging market countries like China, Taiwan, South Korea, and India) is down about 3.5%.

Volatility is measured by something called the ‘Vix’ – also ominously known as the Fear Gauge. This index looks at how choppy the US stock markets are expected to be over the next 30 days. We can read these tea leaves because people buy and sell futures, making bets on what’s going to happen.

If Tesco did derivatives….

If you think the price of a share is going to go up, you can buy a ‘call option’ – the option to buy something in the future at a fixed price. This would be like buying a bottle of Whispering Angel at £15 in your weekly shop for delivery next Saturday, if you knew we were expecting a heat wave. Temperatures would jump, everyone would remember rosé existed, the price would soar to £25, but you would have locked in your bottle for £15. (Don’t quibble with me about Tesco’s logistics, it’s only an example!). A put option is the inverse – you think something is going to fall in price, so you lock in the ability to sell at an elevated price.

Anyway. All this options jiggery-pokery gives us the ability to read the room and see what people are thinking and planning.

For those interested (fun fact to trot out at the local pub tonight?), the Vix is around 27 today. High. Which roughly means that people expect the main US index to bounce around by 1.4% a day over the coming month. The Fear Gauge is not as high as it can be – higher than 35 typically signals blind panic. The fear my teens feel when my bedroom light is on at 3 am as they slink home 2 hours late. Today’s 27 on the Fear Gauge is when they’ve used the last of the milk for the 5th time this week. Bad, but not nuclear. A normal Vix level is between 12 and 20. Just the odd mild snarl when they don’t empty the dishwasher.

Traders go into a frenzy at times of volatility because they can make money on market movements. Some people buy ‘put options’ to protect themselves from losses. If things go really pear-shaped in your main portfolio, you hedge your bets with these put options which make you money when things fall. Taking some of the pain away.

You can also day trade on spikes (not a very sensible idea and only for the experienced who understand the potential losses). I may or may not have had a play this week with some naughty 2x leveraged Brent Crude Oil ETFs which magnify any move up or down, so they are hairy and hardcore! Couldn’t help myself - and reader beware, this is just glorified gambling. But most of us should sit this out and wait for things to settle. And know that this sort of volatility won’t last forever.

In other news….

Not great news on the home front. UK economic growth flatlined in January – even before the energy crisis hit. We are like a slimy green pond which smells a bit and has no fish or frogs in it. Rachel Reeves will attempt to sweep this under the Iran war mat, but the structural pain points are local and embedded.

Higher inflation is heading back our way, with warnings it may spike up again to 3% or even more as this crisis plays out. The AA has helpfully suggested that we make fewer car journeys, focussing only on the essentials. Hmm. This is likely to fall on deaf ears as returning influencers from Dubai redefine the meaning of necessary journeys to include stocking up on fake tan and collagen supplements.

There is no sign of things abating next week. Severe disruption to global oil output and distribution is expected to continue. Energy prices will remain high. I suspect the Vix will at least stay high and probably go up. Our portfolios will jump up and down. Garages will profiteer, and fuel prices will spike. And when the Bank of England meet next Thursday, I can’t see them lowering interest rates as energy prices shoot higher.

Tough times, my friends. I’m not regulated to give financial advice, but I will leave you with a tip. Put a jumper on, pretend it’s June, send the teens out, and buy a bottle of Whispering Angel – currently on offer from Waitrose Cellars for £16.50. You’re welcome.

Holly